Do you have disability insurance? If so, have you reviewed what’s covered in your policy?
If you don’t have disability insurance, do you know how important it is to your financial future?
Disability insurance is one of the most overlooked pieces of coverage. Most Americans don’t have it, and they need it.
In this post, you will learn why disability insurance is so important for working professionals, which type of policy is most important, and three main ways you can find coverage.
Why is disability insurance important?
According to the Council for Disability Awareness, just over one in four of today’s 20-year-olds will become disabled before they retire.
You may be surprised to discover that accidents aren’t usually the culprit, however. The Council for Disability Awareness says that “back injuries, cancer, heart disease and other illnesses cause the majority of long-term absences.”
Imagine being young and becoming disabled – unable to work the rest of your life. Could you pay the bills being absent from work?
Oh, and don’t think your chances of needing disability insurance decreases with time. According to Bankrate, “The Insurance Information Institute in New York estimated in 2009 that 43 percent of 40-year-olds will have an incident causing long-term disability – defined as lasting 90 days or more – by the time they turn 65.”
Imagine being a seasoned salesperson, having a stroke, and no longer being able to speak.
Perhaps you’re a real estate agent . . . what would happen if you couldn’t show homes to your clients anymore due to debilitating back pain? Wouldn’t that be a nightmare?
What would you do in these situations? Well, you could always dip into your emergency savings – if you have it. But what happens when you run out of that money and you still can’t work? What do you do then?
Do you have a working spouse who makes enough money to cover your income loss? No? What then?
That’s when disability insurance becomes vitally important.
Disability insurance pays disability benefits as a partial replacement of your income due to certain injuries or illnesses. Think of it as “long-term income replacement insurance.”
What types of disability policies are available?
There are two main types of policies: short-term and long-term. Short-term policies offer coverage for six months or less while long-term policies offer coverage beyond six months.
Many employers offer short-term disability policies as a benefit of employment. The problem is that these short-term policies, as the name implies, won’t cover you for a disability that sticks around for a long time. If you have a decent-sized emergency fund, you really shouldn’t need short-term disability insurance anyway.
I recommend finding a long-term disability policy that aims to provide coverage up until retirement age. Some large employers offer such coverage, but it’s important to find out exactly what your policy offers – don’t assume you’re covered only to find out you’re not.
How do long-term disability policies typically work?
Okay, so you know to look for long-term disability insurance. How does it work and what benefits can you expect?
Well, don’t expect your entire income to be replaced when the benefits kick in. According to Ron Lieber writing for The New York Times:
Long-term disability insurance usually replaces up to about two-thirds of your income if you can no longer do your own job (or any job, depending on the policy terms).
He goes on to say:
Premiums tend to run roughly 1 to 3 percent of your annual income, depending in part on the results of a medical exam that most people not getting coverage through an employer have to take. You can’t buy coverage to replace any more of your income, since insurers worry that there wouldn’t be enough incentive to try to get better.
Translation? You still need emergency savings even when you have disability insurance – it won’t cover everything!
Where can one find coverage?
There are three main ways you can get disability insurance:
- Through the Social Security Administration
- Through your employer
- Through a private insurance company
The Social Security Administration provides benefits for people who expect to be out of work for at least one year (it’s also based on earnings) and for those who are eligible for Supplemental Security Income. It is very hard to qualify for, and doesn’t replace much of your income, so I would recommend having more comprehensive coverage with better disability definitions
Employer-based disability insurance is usually limited in several ways, although many employers offer the opportunity to purchase further coverage at a discounted rate. Find out what your employer offers and discover more employee benefits while you’re at it!
Private disability insurance is almost always more expensive than its employer-based counterpart, but unlike employer-based disability insurance, it may include better definitions of disability (ie it may pay if you can’t work at your actual job vs being able to work at any job), and you may be able to get a higher percentage of income covered.
Spend a little time looking over your disability insurance options and don’t put off evaluating this very important piece of coverage – you never know when you might need it!